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Be Careful What You Wish For

posted by Katie Porter

At legislative hearings on credit card legislation, bank industry representatives have emphasized that they are voluntarily improving practices (but see here for whether to take those promises seriously) and have argued that Congress should avoid legislating credit cards because federal regulators are better suited to the task. They proffer all the standard arguments about the relative benefits of regulation (agency expertise, flexibility, cooperative solutions, etc), and largely these arguments have worked. Despite hearings every year when members of Congress tell their own, their families' or their constituents' credit card horror stories, the legislation dies. The outcome has been that regulators continue as the primary actors in control of credit cards. In the last two decades, this has translated to little, if any, regulation of credit cards.

Increasingly, there are signs that the regulatory winds are changing (even as the administration and its regulators stay the same). Credit card companies might soon regret their pleas to "let the regulators do their jobs" if the regulators actually start using their authority in ways that equal or go beyond the relatively tame proposed legislation. A case in point is the recent FDIC and FTC action against subprime card issuers that seeks over $200 million in restitution for consumers.

The actions allege that CompuCredit and the issuing banks themselves (First Bank of Delaware and First Bank & Trust) engaged in unfair and deceptive practices in marketing three subprime cards. The products were so-called "fee-harvester" cards, in which half or more of the initial offer of "credit" is subsumed by required fees. The consumer is left with nominal credit, essentially having paid to be able to say they have a card even though there is little remaining credit line to draw on with purchases. The action alleges various other wrongs, including the marketing of a debt transfer card that would purportedly help consumers' credit scores but that actually enrolled them in a debt repayment program (and the consumers allegedly didn't even get the card unless they paid off 25-50% of their charged off debt within 12 months!).

Complaints about the fees and marketing of subprime cards are nothing new. Congresswoman Maloney's CreditCard Holders Bill of Rights, and other pending credit card legislation, would regulate the marketing and terms of these products. But while those bills languish in Congress, the "friendly" regulators may be on the faster track to protecting consumers. While this is only one enforcement action, the FDIC has expalined that the action should be a reminder that FDIC-supervised banks "must be highly vigilant about their third-party arrangements." In other words, the FDIC isn't going to let its institutions hide behind the misconduct of non-regulated subprime lenders while reaping profits. While $200 million is surely a pittance in the grand scheme of credit card profits, the action could encourage banks to reform their subprime card practices even as legislation to force them to do so stalls. When combined with the Federal Reserve's proposed rules to ban certain billing practices, credit card companies may find themselves forced by regulators to make the very changes that they were convinced they could avoid by defeating legislation.


Great post Katie! You think the FDIC and the FTC would stop those kinds of actions if the legislation gets pulled off of the table, or maybe the actions would fade over time? If we get a McCain, I think that scenario it is more likely than not. I think their feeling might be that the legislation could face a veto with not enough votes to override, so why bother. Unless that is more democrats were elected to office adding the possibility of an override to the mix. It seems to me that with the GOP, consumer protection takes a back seat to “fast cash” to big biz. ie. This Mortgage rescue sh*#. I know it doesn’t take effect until October, but the voluntary nature of the law, really sucks! It might be good for our bankruptcy filings but it seems to me another way of throwing more money towards Fannie and Freddie. Rates have not moved; there will be more guarantees by the fed; the fed provided more low interest money to be made available but Mortgage interest rates are going up!! Sup with that?

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